Landstar System, Inc.

Good morning and welcome to Landstar Systems Incorporated's year-end 2023 earnings release conference call. All lines will be in a listen-only mode until the formal question-and-answer session. Today's call is being recorded. If you have any objections, you may disconnect at this time. Joining us today from Landstar are Jim Gattoni, President and CEO, Jim Todd, Vice President and CFO, Joe Beacom, Vice President and Chief Safety and Operations Officer. Now, I would like to turn the call over to Mr. Jim Gattoni. Sir, you may begin.

Thank you, Bill. Good morning and welcome to Landstar's 2023 Fourth Quarter Earnings Conference Call. Before we begin, let me read the following statement. The following is a safe harbor statement under the Private Securities Litigation Reform Act of 1995, statements made during this conference call that are not based on historical facts or forward-looking statements. During this conference call, we may make statements that contain forward-looking information that relates to Landstar's business objectives, plans, strategies, and expectations. Such information is by nature subject to uncertainties and risks, included but not limited to the operational, financial, and legal risk detailed in Lansar's Form 10-K for the 2022 fiscal year, described in the section Risk Factors and Other SEC Filings from Time to Time. These risks and uncertainties could cause actual results or events that differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking information, and Lansar undertakes no obligation to publicly update or revise any forward-looking information. The freight environment throughout the 2023 fourth quarter reflected soft demand and readily available truck capacity. These freight market conditions were consistent with what Landstar experienced during the first three quarters of 2023. The 2023 fourth quarter also included an abnormally soft peak season by historical standards. Nevertheless, even with a weak peak season, Landstar performed mostly in line with the 2023 fourth quarter guidance we issued in our third quarter earnings release on October 25th. We provided revenue guidance of $1,225 million to $1,275 million. Actual revenue came in at $1,204 million, about 2% below the low end of our guidance. We also issued earnings per share guidance of $1.60 to $1.70. Actual earnings per share in the 2023 fourth quarter was $1.62, slightly above the low end of the guidance. It is worth noting again that the 2023 performance continues to significantly outpace pre-pandemic levels. 2023 fourth quarter revenue was 21% over the 2019 fourth quarter revenue, and earnings per share exceeded the 2019 fourth quarter by approximately 28%. Before diving into further detail on Landstar's performance in the 2023 fourth quarter, please note I will make mention of normal seasonal patterns or normal trends. For purpose of today's conference call, normal seasonal patterns and normal trends refer to Landstar's sequential revenue, load count, pricing, or other trends for monthly or quarterly periods from 2015 to 2019, and excludes our historical results from 2020, 2021, and 2022 due to the highly unusual dynamics reflected in those metrics during the pandemic-driven freight cycle. Overall truck revenue was $1,085,000,000 in the 2023 fourth quarter, 29% below the 2022 fourth quarter on a 22% decrease in load volume and a 10% decrease in revenue per load. It should be noted that the 2022 fourth quarter included 14 weeks, whereas the 2023 fourth quarter included 13 weeks. Excluding the estimated truckload volume from the extra week in the 2022 fourth quarter, truckload volume decreased an estimated 19% in the 2023 fourth quarter compared to the 2022 fourth quarter. As we entered the 2023 fourth quarter, the number of loads hauled via truck in early October was trending below normal seasonal patterns. The below normal trend in the number of loads hauled via truck started in the 2022 second quarter, as each sequential quarter-to-quarter change in truckload count from the 2022 second quarter through the 2022 fourth quarter was below normal seasonal patterns due to the soft consumer demand for the types of freight we haul and a slow U.S. manufacturing sector. Based on normal seasonal patterns, truckload volume typically increases slightly from the third quarter to the fourth quarter in a given year. From the 2022 third quarter to the 2023 fourth quarter, truck load volume decreased 6%, a significant underperformance compared to normal seasonal patterns. As to pricing, truck revenue per load was trending reasonably in line with normal seasonal patterns through mid-October. However, revenue per load on loads hauled via truck softened after the first few weeks of October and trended seasonally below normal patterns from September to October. October to November, and November to December. We attribute that negative pattern primarily to the abnormally soft peak season. We look at BCO revenue per mile as a barometer of the rate environment, as this metric mostly excludes the impact of rising and falling fuel costs. During the 2023 fourth quarter, revenue per mile on BCO van equipment remained fairly stable from October to December, whereas revenue per mile on BCO unsighted platform equipment softened through the quarter. BCO revenue per mile on van equipment and on side equipment, which in both cases excludes fuel surcharges, were 17% and 14% higher in December 2023 compared to the December 2019, respectively. However, based on industry data from ATRI, the cost to operate a truck excluded fuel cost was approximately 20% greater in 2022 than in 2019. In other words, the increase in rates since December 2019 likely has not kept up over that period with the increase in cost to operate a truck. We continue to believe that rates in the spot market will stay relatively higher than 2019 levels, given the significant amount of additional cost to operate a truck today. In terms of revenue by equipment type in the 2023 fourth quarter, revenue hauled via van equipment, unsighted platform equipment, power only, and less in truck load revenue all experienced revenue declines from the 2022 fourth quarter. Revenue hauled via van equipment was 29% below the 2022 fourth quarter, mostly on soft demand on the consumer freight we hauled. Revenue hauled via unsighted platform equipment was 20% below the 2022 fourth quarter, mostly due to a slow U.S. manufacturing sector. Other truck transportation revenue, which is primarily comprised of power-only revenue, was significantly favorably impacted by increased demand for substitute line haul services during the pandemic and was now 51% compared to the 2022 fourth quarter. Unsurprisingly, demand for substitute line haul services was significantly softer throughout 2023 compared to 2022. Less than truckload revenue decreased 26% compared to the 2022 fourth quarter on a 15% decrease in load volume and a 13% decrease in pricing. Our rail, air, and ocean services revenue in the 2023 fourth quarter was 23%, or $26 million below the 2022 fourth quarter. Non-truck transportation revenue generated in the 2023 fourth quarter was, however, consistent with the revenue these services generated in the 2023 third quarter. Total network loadings in the 2023 fourth quarter were 21 percent below the 2022 fourth quarter. Total low volume is somewhat influenced by customer mix. For example, Lestor provides truck capacity to other trucking companies, 3PLs and truck brokers, where volumes tend to vary more widely period to period with changes in the levels of freight demand. Revenue hauled on behalf of other truck transportation companies was 15 percent and 19 percent of transportation revenue in the 2023 and 2022 fourth quarters, respectively. During periods of tight truck capacity, other trucking companies, 3PLs and truck brokers, reach out to Landstar to provide truck capacity more often than during times of readily available truck capacity. The freight hauled by Landstar on behalf of other truck transportation companies includes almost all of our commodity groupings. Overall, the revenue hauled on behalf of other truck transportation companies in the 2023 fourth quarter was 42% below the 2022 fourth quarter, contributing 28% of the overall $470 million decrease in quarter over prior year quarter revenue. Year-end 2023 BCO truck count was approximately 13% below the 2022 year-end truck count. Fiscal 2023 BCO truck turnover was 41%, which is higher than the 36% turnover rate Landstar experienced in 2019 during the most recent relatively comparable soft rate environment. We believe the increase in the turnover rate compared to the comparable 2019 period was due to the significance of the decrease in rates, the duration of the negative trend in month-to-month revenue per load, and the increased cost to operate a truck today compared to pre-pandemic periods. I will now pass to Jim Todd to comment on other additional P&L metrics regarding the 2023 fourth quarter performance. Jimbo? Thanks, Jim.

Jim G. has covered certain information on our 2023 fourth quarter, so I will cover various other fourth quarter financial information included in the press release. In the 2023 13-week fourth quarter, gross profit was 124.6 million compared to gross profit of 180 million in the 2022 14-week fourth quarter. Gross profit margin was 10.3% of revenue in the 2023 fourth quarter as compared to gross profit margin of 10.7% in the corresponding period of 2022. In the 2023 fourth quarter, variable contribution was 178.1 million compared to $234 million in the 2022 fourth quarter. Variable contribution margin was 14.8% of revenue in the 2023 fourth quarter, compared to 14% in the same period last year. The increase in variable contribution margin compared to the 2022 fourth quarter was primarily attributable to mix, as an increased percentage of revenue was generated by BCO and offended contractors, which typically has a higher variable contribution margin than revenue generated by other modes of transportation. and an increased variable contribution margin on revenue generated by BCO independent contractors. Other operating costs were $13.2 million in the 2023 fourth quarter compared to $10.3 million in 2022. This increase was primarily due to increased trailing equipment maintenance costs and decreased gains on sale of used trailing equipment. Insurance and claims costs were $27.3 million in the 2023 fourth quarter compared to $29.6 million in 2022. Total insurance and claims costs were 6% of BCO revenue in the 2023 period and 5% of BCO revenue in the 2022 period. The decrease in insurance and claims costs as compared to 2022 is primarily attributable to decreased net unfavorable development of prior year claim estimates, partially offset by increased premium expense, primarily for commercial auto and excess liability coverage. During the 2023 and 2022 fourth quarters, insurance and claims costs included $900,000 and $3.8 million, respectively, of net unfavorable adjustments to prior year claim estimates. Selling general and administrative costs were $52.7 million in the 2023 fourth quarter compared to $56.1 million in 2022. The decrease in selling general and administrative costs was primarily attributable to a decreased provision for incentive and equity compensation under our variable compensation programs, partially offset by increased employee benefit costs. In the 2023 fourth quarter, the provision for compensation under variable programs was $100,000 compared to $5.3 million in the 2022 fourth quarter. Depreciation and amortization was $13.7 million in the 2023 fourth quarter compared to $14.8 million in 2022. This decrease was primarily due to decreased depreciation on the company's trailer fleet, partially offset by increased depreciation on software applications resulting from continued investment in new and upgraded tools for use by agents and third-party capacity providers. The effective income tax rate of 24.1% in the 2023 fourth quarter was 60 basis points lower than the effective income tax rate of 24.7% in the 2022 fourth quarter. as the effective income tax rate in the 2023 fourth quarter was favorably impacted by certain positive state tax developments. In addition, the effective tax rate in the 2022 fourth quarter was unfavorably impacted by the impairment in deferred tax assets related to employee equity compensation arrangements as a result of performance conditions being attained as of year end. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $541 million. Cash flow from operations for 2023 was $394 million, and cash capital expenditures were $26 million. Back to you, Jim. Thanks, Jim.